Clicking on all cylinders

By focusing on fresh offerings, online grocers are setting the stage for the future of the industry. It is up to brick-and-mortar retailers to keep pace.

freshdirect3There was a time when eating an overripe or diseased piece of fruit or meat could have meant life or death. People used their senses to determine if their food was safe—looking, smelling, touching—before tasting it.  Food quality has since evolved, but these habits have become engrained. It may no longer be a matter of life or death, but consumers still want to bring home the ripest, most flavorful fresh items—and looking, smelling and touching are generally considered the best ways to do so.

Or at least they were.

Some shoppers now choose their apples by the number of stars displayed underneath each variety. These same shoppers will choose a cut of steak based on a recommendation from a stranger and add an artisanal cheese made by a “local” cheesemonger 5,000 miles away to their cart before checking out. Then they may get dressed and start their day.

Welcome to the new online grocery store.

According to the June 2013 annual report, The Future of Food Retailing, published by Willard Bishop, e-commerce sales for food and consumables increased 16.9% in 2012, while traditional supermarkets saw only a 2.9% growth. The report predicts that the e-commerce segment will continue an aggressive annual growth rate of 12.1% between now and 2017.

While CPG categories carved themselves a path into online retail years ago, perishables are only now gaining enough speed to leave a footprint on the market. The success of the fresh categories—which include produce, dairy, bakery, deli and meat—will make or break the future of grocery e-commerce, say industry observers, and the perfect storm is brewing. More consumers than ever are placing their trust in the World Wide Web for their shopping needs, a shift that will continue as Gen Y and Millenials become the target shoppers and online grocers fine-tune the logistics.

“Retailers are working very hard to overcome some of the problems that plagued e-grocery in the beginning,” says Jim Hertel, managing partner for Willard Bishop, a Barrington, Ill.-based food retail consultancy. “Whether triggered by AmazonFresh or just speculation, a lot of traditional brick-and-mortar retailers are experimenting with different ways to fulfill orders and improve upon the value proposition. Market share is small now, but it may get up to somewhere in the range of 15% to 20%. Brick-and-mortar retailers cannot afford to turn their backs.”

A number of failed attempts at e-commerce, such as those by WebVan and Publix Super Markets—which tried its hand at both an at-home delivery and a curbside pick-up service—prove it is not an easy venture. Even Amazon waited nearly six years before taking its AmazonFresh division beyond the borders of its Seattle hometown to the Los Angeles market.

Yet, the prosperity of others is proof that it can be done. Online-only models like AmazonFresh and Fresh Direct have secured their place in the online-only delivery business model, with AmazonFresh now offering pick-up as well. A handful of brick-and-mortar supermarkets have successfully entered the e-commerce market offering delivery, pick-up or both, including Ahold’s Peapod, ShopRite, Harris Teeter and Hy-Vee. Making matters more interesting, there are dozens of start-ups introducing new business models, such as “on-demand delivery” or personal shopper systems that combine product databases from multiple stores.

Where do brick-and-mortar store fall into this new industry landscape? That is to be determined as they are at somewhat of a crossroads, say observers. While consumers are not going to give up shopping at brick-and-mortar stores overnight, nor in the next decade for that matter, many retailers are altering their business model in order to remain competitive in the developing landscape.

One thing is for sure, online retailers are legitimate competitors and many have their sights set on the brick-and-mortar market. “We focus on Fairway and Whole Foods everyday,” says Jason Ackerman, CEO of New York-based Fresh Direct. “That is our competition. That is where our energy is.”

The trick of the click

Understanding the online consumer is not cut-and-dried. Research shows that early adopters of e-commerce were attracted to the convenience and timesaving factors of online ordering. The stereotypical online grocery shopper has always been a busy working family, says Peg Merzbacher, director of marketing for Skokie, Ill.-based Peapod.

It is no longer that clear cut. Merzbacher says that Peapod’s clientele includes city residents who do not own a car, elderly shoppers who have difficulty getting around and even students. Observers say people often experiment with online grocery shopping when there is a temporary need, such as an injury, and walking around a store is not so easy. Shoppers in these “special situations” tend to drift in and out of the e-grocery world, says Willard Bishop’s Hertel; some may try it and adopt it, while others will rely on it only when necessary.

Ultimately, it will be the Gen Y and Millenial demographics driving the e-commerce format into the future. Hertel predicts online grocery shopping will become, what he calls, “discontinuous.” As the shift in generation occurs the thought process will change from “why would I order online” to “why would I not order online,” he says.

These generations grew up with the Internet at their fingertips and most have adapted it into their lifestyle. Naturally, they have more trust in e-commerce than older generations. “The Baby Boomer population often says they need to pick their own produce to know they are getting good quality, but Gen Y shoppers have not picked up this habit. A lot of younger shoppers don’t even know how to pick out a pineapple,” says Anne Zybowski, vice president of retail insights for the Boston-based consultancy Kantor Retail.

Fresh Direct found a way to mimic consumers’ in-store shopping habits online. The e-grocer, which serves the five boroughs of New York and some surrounding suburbs, gives its produce offerings a Daily Quality Rating depicted by one to five stars—from “below average” to “never better”—so consumers can make a more educated purchasing decision. Company officials say that 60% to 70% of its retail sales are from fresh categories, the opposite of a traditional grocer.

One of the largest barriers in food retail—and retail in general—is winning consumer trust. Take away that hands-on shopping and personal interaction and the difficulty overcoming the trust obstacle is multiplied for e-commerce, especially when it comes to fresh categories.

“Trust is earned; it is not something you can promise,” says Ackerman. Without a brick-and-mortar business to build off the reputation of, Fresh Direct aims to earn its consumers trust in a number of ways. “One is through execution, by meeting people’s expectations in terms of quality. The second is through customer service; we have a 100%, no-questions-asked guarantee for everything we sell. This way, the customer knows if they make a mistake there is no risk when it comes to getting their money back,” he says.

Brick-and-mortar stores entering the online market do have an advantage over web-only retailers. Most have a solid reputation throughout their communities and a physical location for consumers to visit for reassurance. Most of all, they offer options.

A prime example of this is Peapod. The Ahold subsidiary partners with its sister companies—Stop & Shop, Giant-Landover and Giant-Carlisle—where applicable and provides a warehouse delivery service in its Midwest markets, which includes parts of Illinois, Wisconsin and Indiana. By teaming up with its sister stores the company gives the consumer the choice between in-store shopping, online delivery and most recently, pick-up.

“Last August we introduced a pick-up option, and now offer it at more than 40 locations,” says Peapod’s Merzbacher. “The Ahold USA network already has an online shopping and fulfillment capability so it made sense to add pick-up as an option. For consumers that do not want to spend the $60 minimum for delivery, this works because there is no fee.”

Many observers predict this click-and-collect, or pick-up, model will thrive in areas of the U.S. where the population is too sparse for delivery to pay off. Kantor Retail’s Zybowski compares the U.S. market to France. “They may not have as much rural space, but the nation is similar to the U.S. with its geographic dispersion. As a result, they have seen huge growth in click-and-collect and ‘drive’ formats—pick-up formats where consumers drive up and have the groceries brought out from a warehouse to their car,” says Zybowski. “In two years France saw consumer use increase from 3% to 10%, and last year there were 10 to 30 new click-and-collect formats built each month.”

Many stores in the U.S. have launched a version of this type of service. These formats offer something in between online and in-store shopping that appeal to transitional shoppers. Observers say this format promises to be successful because the U.S. is filled with consumers who have diverse shopping personalities—divided across generations and ethnicities—that all have their own preference—and definition—of service.

“From the retailer’s perspective, they should want to engage all their consumers in whatever way the consumer wants to be engaged. No one type of behavior will be right for everyone so the retailer should think about providing multiple opportunities to stay relevant for consumers, when and how the consumer wants it,” says Hertel.

Reinventing fresh

yummy1Engaging all consumers means meeting all expectations. According to David Feit, vice president of strategic insights for The Hartman Group, based in Bellevue, Wash., the early adopters of online shopping were, in general, consumers who cared a little bit less about fresh than those who first rejected it. The more recent wave of shoppers is more food-oriented.

Brick-and-mortar stores have catered to this “foodie” audience by adding upscale foodservice offerings and local brands, say observers. Whole Foods, in particular, has done a good job with this, offering extensive ready-to-eat meals, fresh foods and other fresh options for shoppers to take away.

Online retailers are playing the same game. Feit uses AmazonFresh as an example, describing the company as an “innovator in the fresh categories.” The Seattle-based e-commerce brand partners with local and artisan producers and growers to offer products unavailable in most traditional supermarkets.

Relay Foods is another one. The Charlottesville, Va.-based grocer that delivers online orders to customers’ homes or specific drop-off points, works with local produce growers and artisan suppliers as well as supermarket chains.

“Part of the shopping experience is having access to specialty cupcakes, artisanal cheese, fresh fish from the market or homemade jams. You can even get the equivalent of a CSA (Community Supported Agriculture) delivery through AmazonFresh in Seattle,” says Feit. “By aggregating the long tail of the small independent local brands that are known for their quality, they open themselves up to a larger potential audience. While it may not necessarily be fresh produce, these offerings queue the consumer to recognize the quality of the products available.”

Some of the smaller regional brands of the last decade went nationwide thanks to e-commerce. Vita Coco, for example, began selling on Amazon back in 2007 putting it in front of consumers nationwide, despite its limited presence in supermarkets.

Arthur Gallego, the communications director for the New York-based company, says it was the success on Amazon that exemplified the brand’s appeal and popularity. “Retailers saw the success of the brand on Amazon and realized they should be carrying it,” he says.
“People are more open to trying new things online, particularly certain types of products.Obviously consumers are not going to ‘try’ an $18 bottle of olive oil; they will likely want to go into a store and taste it first. But for a product like ours that people enjoy regularly and prefer to buy in bulk, it is perfect,” Gallego says. The company has had such success with Amazon that it has launched its new kids line on the website exclusively.

Selling online helps level the playing field for young brands, say manufacturers. This is especially the case for gluten-free and other allergy-friendly categories that, until recently, received limited shelf space in traditional stores.

An online presence helped Bakery on Main, a gluten-free baked goods brand based in East Hartford, Conn., build brand awareness and distribution. “Very often someone will find out about our product and call here asking about where they can purchase it,” says Michael Smulders, founder of Bakery on Main. “If there is no retailer stocking our product near them or they do not want to travel, we can then easily direct them to Amazon.”

In the end, Hertel says there are really two main reasons why people stick with brick-and-mortar stores. “First is the quality of fresh. Retailers have to work to stand out on the quality of their perishable departments. Second, it is really not that inconvenient for people to go to the store. Most people live within two miles of a grocery store and they do not mind going grocery shopping.”

He adds that whether retailers jump on board with an online ordering system or target consumers from another angle, “they have to leverage the benefits of their store in some online capacity if they want to stay in the game.”

The battle for Los Angeles

yummystorefrontThe June launch of AmazonFresh into the Los Angeles market raised a lot of eyebrows in the grocery world. The expansion was the first move made with its fresh division outside of its home city of Seattle, and will likely not be the last.

It is not surprising that the Internet giant is being welcomed with open arms in Los Angeles. was recently named “most desirable brand” in the third annual Brand Desire Report, put out by the global brand consultancy Clear, based in New York.

Mike Weber, managing director of Clear, attributes Amazon’s title to a number of factors. “They built substance around their brand,” he says. “It makes a fundamental difference in your life and takes convenience, like a one-click process, to another level. They can predict your behavior and prompt your next move. They drive recommendations and connect people globally.” According to the report, 33% of participants said they would not consider any alternative to Amazon.

Will Amazon be able to sustain its popularity into grocery? It could be too soon to tell, say industry observers, as there are numerous competitors.

Take, which also serves the Los Angeles area. The online retailer designed its own business model by integrating its four brick-and-mortar locations with “on-demand” delivery in as soon as 30 minutes to develop a niche following in the communities it serves. “Integrated Online Retail” is what co-founder/CEO Barnaby Montgomery calls it.

With only a $17.50 minimum online order and $3.99 delivery fee, the business model accommodates consumers’ growing tendency to shop two or three times a week for fresh product, versus a large once-a-week order that high minimums and delivery fees require. “We tried to mimic the offline behavior of the consumer. They go to the store when they realize they need something. By offering delivery on demand we are fulfilling the order when it is convenient for them,” says Montgomery. “We do about 20,000 orders a month; all of our facilities are at capacity.”

In addition to’s on-demand approach, company’s officials attribute its success to its physical presence in the community, calling it “critical to the business.” The company’s marketing expense as a percentage of sales is less than the industry average, says Montgomery. “We are not pushing product out the doors; consumers want to use us because of our relationship in the community. The fact that we can deliver on demand means within our geography we see more demand.”

AmazonFresh has a different type of consumer in mind. Available only to its Prime members, the company kicked off in Los Angeles with same-day and early-morning delivery options. The company is offering a 90-day trial to Prime members. After that AmazonFresh carries a $299 annual fee, providing free delivery on orders as small as $35.

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